Personal Finance

‘Low-volatility portfolios do better over the long run’

Aarati Krishnan | Updated on January 24, 2018 Published on February 08, 2015

Just because you want to gamble, the market is not obliged to give you high returns



Most new fund houses have struggled to make a mark in the Indian markets, occupied by entrenched players such as Reliance and HDFC. Axis Mutual Fund has been the rare exception, rising to the top 10 AMCs within five years of its debut. We talk to Chandresh Kumar Nigam, MD & CEO, Axis Mutual Fund, to find out what sets it apart.



Within a short period of five years, Axis Mutual Fund has managed to build a strong and consistent track record for its equity funds. What has helped deliver this?

We have believed that consistency and sustainability of performance are key to deliver value to our investor, whether in debt or in equity. A key component of the philosophy is risk management. I have been managing equity money since 1991.

The learning from my early years was that this business is as much about risk management as it is about returns and assets.

Before joining Axis, I ran an India-dedicated long-biased fund largely catering to global institutional investors. In those markets, you could never impress anyone by saying: “Hey! The index gave a 40 per cent return; we gave you 80 per cent.” They would immediately ask, “at what risk levels?” This understanding helped us to lay out a comprehensive risk management process at Axis Mutual Fund.

Investors are often told: if you want high returns, take high risk. But the truth is that low volatility portfolios perform better over the long run.

Just because you are in a mood to gamble, the market is not obliged to provide you with high returns. Therefore, in all our portfolios, including debt and equity funds, we run portfolios with volatility that is much lower than the benchmark.

What are the filters you apply to select the right stocks?

From the beginning, we have taken the view that we are business investors and not stock investors. The first factor we look for is quality which is essentially sustainability of reasonably high profitability. The second is an understanding of fair value, so that we don’t pay a crazy price for any stock. This business is not about relative PE. It is about fair value through discounted cash flow analysis. We are also the only fund house that actively manages portfolio liquidity. We continuously evaluate our portfolios to see if, say, 75 per cent of the portfolio is saleable within, say, using 20 per cent of the average trading volume.

Do you really need such an involved process to select stocks?

If you look at the BSE 100 over the last 10 years, the index has given 15 per cent annualised return. The top quartile stocks in the index have given 26 per cent return. But the bottom quartile has given negative 4 per cent.

The only thing common to the top quartile stocks is the sustainability and profitability of their businesses.

Therefore, we look at pricing power as a primary criterion.



Axis Mutual Fund has built up a better reputation for equity funds than debt funds. What are you doing about that?

Our debt funds are reasonably good performers, but we haven’t translated that into commercial success yet. Risk management is quite critical in debt funds too. Unfortunately, unlike equity, investors have seen debt funds, especially duration funds, as more of a tactical allocation.

This has incentivised fund houses to run very aggressive strategies when the going is good, but which leads to pain and heartburn when there is a reversal like in 2010 or 2013.



What’s your view of the stock market?

The worst growth we got in the recent past is 4.5 per cent, the best is 8 per cent; we may end up somewhere in the middle.

But the real story is in the micros, i.e. company performance. In India, you can always find 50 businesses that can grow at 20 per cent over the next five years.

Now that the macros are improving, this will be easier. What is working in India’s favour now is that everything else in the world is so despondent. The US is a beacon of growth, apart from that India is the only large economy where one can invest.

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